ECONOMIC TRENDS

SAUDI DEFIES COVID-19 HEADWINDS TO KEEP RECOVERY ON TRACK

Saudi Arabia’s non-oil economy is expected to accelerate this year, driven by higher investment from the Public Investment Fund and strong private sector demand, according to the International Monetary Fund (IMF).

The non-oil sector will grow 4.3% in 2021, taking the overall GDP growth to 2.4%, the IMF estimates. Next year, GDP growth will jump to 4.8% as the oil and non-oil sectors are expected to expand by 6.8% and 3.6%, respectively.

The IMF noted that Saudi authorities have expressed confidence about the economic outlook on the back of Vision 2030 reforms, swift policy response to COVID-19, and a rapid rebound from the second half of 2020.

The government has spent USD 147.7 billion in financial and borrower support measures during the pandemic, while fiscal measures have accounted for USD 14 billion and labour market support an additional USD 7.4 billion, as per IMF estimates.

But the fund believes that some measures can be rolled back as the lockdowns have ended and growth, corporate cashflows, and labour demand have rebounded.

Indeed, the government has moved swiftly with tax deferrals, which peaked at end-June 2020, almost entirely repaid by the year-end, while the employment support has been refocused on sectors such as transportation and hospitality, which continue to be impacted by the pandemic.

Crucially, the Saudi Central Bank said in June that it is extending a deferred payment programme to support small businesses impacted by the coronavirus crisis until at least September. The initiative was launched in March 2020 and has absorbed deferred payments of USD 44.53 billion since its inception.

“The IMF staff reaffirmed also that the policies to support the non-oil economy have been successful, that the creation of the High-Level Crisis Response Committee was central to effectively and pro-actively managing the crisis, and that strict early containment and health mitigation measures limited cases and fatalities,” according to the Ministry of Finance.

The IMF noted that Saudi authorities believe the COVID-19 crisis has not affected reform momentum, investment initiatives, privatisation and public-private partnerships (PPPs), and other structural improvements would likely boost non-oil growth.

For its part, the IMF has identified PPPs as a key growth driver, especially as the government has recognised existing assets for potential sale. “The aim is to increase the private sector involvement in 16 key industries, infrastructure projects, and public services,” the report has underscored.

The Saudi government passed the Private Sector Participation Law in March 2021 with implementation from July. The law provides a regulatory framework for PPPs and privatisations, including by offering protections for private companies and foreign investors, and it exempts privatisations from employment nationalisation requirements. The programme should increase the efficiency of capital allocation and service provision for the government, but contingent fiscal risks should be identified and managed.

The objectives of the privatisation programme is to ensure the private sector takes a leadership role in economic development, while the government can unlock funds with sales of state-owned assets for investment. It is hoped that the privatisation programme will boost the quality of services, cut government spending and attract foreign direct investment.

“Taken with other developments in the last few years, such as the Bankruptcy Law, the Moveable Assets Security Law and changes to the Commercial Pledges Law, as well as recent relaxations of the rules on foreign investors owning controlling stakes in Saudi Arabian companies, the PSP Law is further evidence of the progress made by the Kingdom in creating a climate which is welcoming to international investment, and in further transforming and diversifying the Saudi Arabian economy,” according to law firm Norton Rose Fulbright.

The IMF also praised the government’s various efforts and outlined new opportunities for the economy. It especially noted the "Shareek" partnership programme, which provides incentives through tax system, access to credit, and regulatory reforms to encourage investment.

In addition, the cancellation of Kafala sponsorship system will lead to a more robust labour market that will attract highly skilled foreign workers.

“The staff also projected that the credit to the private sector will grow strongly, boosted by lending for housing and to SMEs. The staff project the new social security law to be an important step to strengthen the framework for providing income support to the less well off,” the ministry noted.

In addition, the IMF also highlighted the kingdom’s efforts to deepen domestic capital markets, invest in e-government to harness the potential of digitalisation, and provide support to SMEs and entrepreneurs, ensuring that the country enjoys a diversified and inclusive recovery.